Hanging on the telephone

Page Tools

The Australian sharemarket has been on its strongest run in over a decade but Telstra shareholders have been left behind - yet again.

By this morning, the future of phone giant Telstra will be a lot clearer - a Coalition victory will mean a continued push to privatise the remaining 50.9 per cent of the utility, while Labor will maintain the status quo and freeze some of Telstra's charges.

The sharemarket hates uncertainty, so this election campaign has no doubt weighed on the Telstra share price. But the bad news for investors is that, while it might have made the difference of 10 cents or so here and there, Telstra shares are unlikely to soar now that the election is over. That's regardless of who is the victor.

Yet the stock with the most shareholders in Australia has played little part in the strongest run on the sharemarket in more than a decade.

Telstra shares have hardly budged in comparison to many other widely held stocks this year, and have been a sorry investment since the T2 partial privatisation in 1999, when the Government offloaded its second tranche of shares at $7.40 a piece - Telstra closed on Friday at $4.71.

As a financial experience, the T2 privatisation has been a disaster, although those new to the sharemarket - and there were well over a million who made their first share investment through the two Telstra part-privatisations - should at least console themselves with the knowledge that they have learnt a lot first hand about share investing.

From the initial share sale in November 1997, many have seen that you can make much money quickly from shares.

That offer led 1.8 million investors to buy Telstra stock at $3.30. When Telstra stock topped $9 a share 18 months later, many of these first-timers must have thought they could have bought shares and watched their money multiply.

But then the T2 Telstra tranche came along in November 1999 to show that what goes up on the sharemarket sometimes comes down - and with a bang. The 1.7 million investors who stepped up to the plate for T2 took an average 700 shares - their $5180 investment is now worth $3297.

In comparison, if they had made the same investment at the same time in ANZ, for example, they would have secured a 91 per cent gain on their money and would be sitting on an investment worth close to $10,000, three times what they have now.

In hindsight, you could say that the Federal Government was canny unleashing the T2 sale when it did, and with shareholders feeling so good after the amazing success of the first Telstra sale.

At the time, the tech boom was raging and Telstra was supposedly going to lead the advances in Australia. We now know that Telstra is not all that good at investing in this new technology stuff. It remains the massive cash-generating phone company with monopoly power over our copper-cable network that it has always been.

That's why Telstra shares no longer command a sharemarket premium, as it is considered a cash-generating utility, rather than a growth stock.

In exchange, last year the management of Telstra decided it would be better to start returning money to shareholders than to continue to squander money, as it had been doing. The Telstra board has promised to give back $1.5 billion a year over the next three years, and this means the stock is offering a 6 per cent plus fully franked dividend yield. When you take the franking credit into account, that's a dividend return of more than 9 per cent.

So, what to do? Well first off, if you were a T2 investor and are still holding on, you can forget about getting your money back. Shaw Stockbroking's Scott Marshall says a fair chunk of that money has now been lost.

"No one expects Telstra shares to get anywhere near $7 in the foreseeable future," he said.

"So it's extremely unlikely that you will be able to sell shares at a profit."

Mr Marshall says there is also no rally in the stock over the next year or two, so anyone hanging in there should be doing so for the dividend.

"There's no significant share price upside, and no significant revenue upside," he said.

"You certainly shouldn't be buying Telstra to participate in any sharemarket strength."

Holst's Michael Heffernan agrees: "I don't think Telstra is going to go down, I think it is going to hang around where it is. If you want to participate in the sharemarket growth story, then you are better off out of it."

CommSec's Graham Woodbridge believes Telstra will trade between $4.70 and $5 over the next 12 months, but that the dividend is attractive.

"It's attractive from the dividend point of view, but I don't think I would be looking for a lot of growth in it," he said.